The most recent financial statements for GPS, Inc., are shown here: Income State

Question

The most recent financial statements for GPS, Inc., are shown here: Income Statement Sales $22948 Costs $11660 Taxable Income ? Taxes (40%) ? Net Income ? Balance Sheet Assets $57861 Debt $22909 Equity ? Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1601 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $29902. What is the external financing needed? (Negative amount should be indicated by a minus sign.) (Omit the "$" sign and commas in your response. Enter your answer rounded to 2 decimal places. For example, $1,200.456 should be entered as 1200.46.)

Explanation / Answer

Income statement:

Balancesheet:

Next year sales projection = $29,902

Sales increase = ($29,902 $22,948) / $22,948 = 30.3%

Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:

Balancesheet:

The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or:

Dividends = ($8,846.4 / $6,772.8)($1,601) = $2,091.17

The addition to retained earnings is:

Addition to retained earnings = $8,846.4 - $2,091.17 = $6,755.23

And the new equity balance is:

Equity = $34,952 + 6,755.23 = $41,707.23

So the EFN is:

EFN = Total assets Total liabilities and equity

EFN = $75,392.88 - 64,616.23 = $10,776.65

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